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Highlights

GAO first designated DOD financial management as high risk in 1995. GAO's biennial reports on high-risk areas are meant to bring focus to specific areas needing added attention. Areas are identified, in some cases, as high risk due to their greater vulnerabilities to fraud, waste, abuse, and mismanagement. Since 1995, weaknesses in DOD's financial management have adversely affected not only the reliability of reported financial data, but also the efficiency and effectiveness of its business operations. The department has annually acknowledged that pervasive, long-standing weaknesses in business systems, processes, and controls have prevented auditors from determining the reliability of reported financial statement information. Weaknesses in Army military pay systems, processes, and controls have contributed to this problem. The Department of the Army paid about $4.7 billion in federal payroll taxes for approximately 638,900 active duty military servicemembers for calendar year 2007, from the active duty Army military personnel appropriation. The Secretary of the Army relies on the Defense Finance and Accounting Service-Indianapolis (DFAS-IN) for processing and accounting support in paying the taxes for active duty servicemembers. This support includes calculating and reporting federal payroll taxes for active duty Army servicemembers to the Internal Revenue Service (IRS) and paying those taxes to the Department of the Treasury. Federal payroll taxes are amounts withheld from employees' wages for federal income taxes, Social Security, and Medicare (Hospital Insurance) taxes, as well as the employer's mandatory matching contributions for Social Security and Medicare taxes. GAO's five standards of internal control provide the overall framework for establishing and maintaining internal control in the federal government. These standards help management identify and address major performance and management challenges and areas at greatest risk of fraud, waste, abuse, and mismanagement. Further, the Office of Management and Budget Circular No. A-123, Management's Responsibility for Internal Control, relies on GAO's standards to provide the specific requirements for federal agencies, such as the Department of Defense (DOD), to assess and report on controls. The scope of this review comprises control activities and monitoring--two of the five standards for internal control. Our prior reviews of the DOD budget requests for military personnel appropriations identified possible inaccuracies in the processing of the active duty Army military personnel federal payroll taxes and potential weaknesses in control activities at DFAS-IN. Following that identification of possible inaccuracies, under the authority of the Comptroller General to conduct evaluations under his own initiative, we conducted this performance audit to determine whether DFAS-IN has effective controls in place for processing of the active duty Army military personnel federal payroll taxes. We also assessed whether DFAS-IN conducted periodic monitoring of its processing of federal payroll taxes. We focused our review on federal payroll taxes for the period January 2004 through June 2008.

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Recommendations

Recommendations for Executive Action

Agency Affected Recommendation Status
Under Secretary of Defense (Comptroller) To strengthen internal control and monitoring activities over active duty Army military personnel payroll, the Under Secretary of Defense (Comptroller) / Chief Financial Officer should require the Director, DFAS, in conjunction with the Director, DFAS-IN, to review and correct DFAS-IN's procedures for information processing of federal payroll taxes to include the following: (1) perform reconciliations of active Army military pay system reports with the quarterly federal payroll tax returns and year-end annual federal tax reports and (2) review individual servicemembers' tax withholding and correct any errors.
Closed - Implemented
DOD and the DFAS Indianapolis officials agreed with our findings and implemented corrective actions based on our discussions and recommendations. Actions taken include a May 21, 2009 Memorandum from the Director, Defense Finance and Accounting Service (DFAS), Indianapolis stating that all actions to correct GAO-identified deficiencies and errors have been completed. DFAS Indianapolis implemented corrective actions for reviewing and revising the DFAS Indianapolis procedures by 1) reconciling the active Army pay system reports with the quarterly federal payroll tax returns and year-end annual federal tax reports and 2) reviewing individual servicemembers' tax withholding and correcting any errors. We documented the DOD implementation of the recommendations in the approved Accomplishment Report GAO-09-1903A.
Under Secretary of Defense (Comptroller) To strengthen internal control and monitoring activities over active duty Army military personnel payroll, the Under Secretary of Defense (Comptroller) / Chief Financial Officer should require the Director, DFAS, in conjunction with the Director, DFAS-IN, to review and correct DFAS-IN's procedures for accurate and timely documentation of federal payroll tax transactions.
Closed - Implemented
The Deputy Chief Financial Officer, Office of the Under Secretary of Defense, agreed with our findings and issued a June 3, 2009 Memorandum that requested the Director, DFAS, take actions to implement GAO's recommendations. DFAS Indianapolis implemented corrective actions for reviewing and revising the DFAS Indianapolis procedures by 1) reconciling the active Army pay system reports with the quarterly federal payroll tax returns and year-end annual federal tax reports and 2) reviewing individual servicemembers' tax withholdings and correcting any errors. We documented the DOD implementation of the recommendations in the approved Accomplishment Report GAO-09-1903A.
Under Secretary of Defense (Comptroller) To strengthen internal control and monitoring activities over active duty Army military personnel payroll, the Under Secretary of Defense (Comptroller) / Chief Financial Officer should require the Director, DFAS, in conjunction with the Director, DFAS-IN, to establish procedures and plans to periodically monitor the processing of federal payroll taxes.
Closed - Implemented
The Deputy Chief Financial Officer, Office of the Under Secretary of Defense, agreed with our findings and issued a June 3, 2009 Memorandum that requested the Director, DFAS, take actions to implement GAO's recommendations. DFAS Indianapolis issued a May 21, 2009 memorandum documenting that it had established procedures and plans to periodically monitor the processing of federal payroll taxes. We documented the DOD implementation of the recommendations in the approved Accomplishment Report GAO-09-1903A.

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